Lenders see funding fillip in new rules

ASIC’s Greg Tanzer said the Financial Stability Board is now looking into the reasons why securitisation, which is seen as an important source of growth and funding to revive ailing economies, is still particularly flat in Europe.
Photo: Glenn Hunt

Banks and non-bank lenders say new rules governing loan securitisation foreshadowed by the prudential regulator should make it easier to tap demand from offshore funds while asset-backed bonds in Europe and the US remain scarce.

Under the changes, the Australian Prudential Regulation Authority will allow banks to use so-called master trusts, a common vehicle for issuing multiple securitisations in offshore markets.

Suncorp
Bank treasurer Tim Hughes said US investors are happy to hear master trusts will be a feature of the new rules.

“Master trusts will create more diversity for us," he said. “Investors in the US are very encouraged to hear that master trusts will be a likely part of the new regulations."

Most importantly for Suncorp, master trusts will reduce the cost of derivatives used to hedge the risk of swapping funds raised overseas into Australian dollars.

“Hedging is a big aspect for us, and the expense related to that has been very high," Mr Hughes said. Under the new scheme, local banks may also be able to use master trusts to fund their credit card loans, as is common elsewhere.

Master trusts take earnings from assets and then issue securities to investors based on cash flows from the assets. These allow the issuance of numerous transactions through the same structure, reducing issuance costs. Master trusts require issuers to retain a “sellers share". This raises the amount of available funds at any one time to pay investors.

So-called “soft bullet bonds" in these structures also allow the timing of payments to investors to be matched with the cash flows from the assets backing the securities. “Controlled amortisation" allows cash to be retained when repayments are higher than expected.

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These elements reduce the risk of extensions to the maturity date of securitisations, which is one reason for higher hedging costs. APRA’s moves come as regulators globally grapple with how to avoid killing off the reviving securitisation market with red tape, while preventing the regulatory clampdown on banks shifting poor lending to the shadow banking sector. Australian Securities and Investments Commission commissioner
Greg Tanzer
said regulators should help the securitisation market to recover but must manage how risk is allocated.

“Prudentially regulated entities do not want to find themselves exposed to non-regulated markets," he told the Australian Securitisation Forum conference in Sydney on Tuesday.

His views on risk allocation echo those of
Charles Littrell
, APRA’s head of policy, research and statistics, who warned master trusts will not be allowed to apportion too much risk to Australian lenders.

The Australian securitisation market has seen strong growth in the past year. But in Europe it is almost non-existent and in the US remains weak. One of the trickiest balancing acts in Australia is how to manage the impact of the over-the-counter derivatives regulations being phased in by ASIC.

Banks are now reporting OTC derivatives transactions to clearing houses in Australia and overseas, and will be clearing trades from next year. This imposes costs of compliance as well as credit risk.

Mr Tanzer said the structured nature of the transactions meant the new rules could have different implications for each transaction. “Given the importance of derivatives to securitisation, there is likely to be some impact. However the application of these reforms are more complicated than for other parts of the industry."

He said ASIC would have to work closely with the sector to ensure there are no unintended consequences.